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How does Bankruptcy work?

Welcome to how bankruptcy works in Ontario and Canada

The following content is the script of “How does Bankruptcy work?” seminar. It is posted here for your convenience if you prepare to read instead of listing to the seminar.

Hello and welcome to the Bankruptcy seminar.
No one start his or her live intending to go bankrupt. People go bankrupt for reasons beyond its control. Bankruptcy is not a bad thing. It used to be socially unacceptable, however, now it is your legal right to declare bankruptcy. Bankruptcy should be considered as one of the methods to become debt free, but if comes with a price.

Slide #2 – Objectives

Let’s start by quickly reviewing what we’ll cover:

  • What is an insolvent person and answer the who, the what and the why filing for bankruptcy.
  • We’ll examine why filing for bankruptcy may be your best option.
  • We’ll also discuss the characteristics of Bankruptcy, the advantages, the disadvantages, the costs, ways to reestablish your credit and answer a few of the most frequently asked questions

Slide #3 – Complexity of Bankruptcy Laws

I want to highlight that Bankruptcy laws are so diverse and complex, it is impossible to deliver a comprehensive seminar that covers bankruptcy laws in all jurisdictions around the globe.

Slide #4 – What is an Insolvent Person?

An insolvent person is an individual person or company who is not in bankruptcy and who resides or carries on business or has property in Canada; whose liabilities to creditors provable as claims under this Act amount to one thousand dollars, and

  • Who is for any reason unable to meet his obligations as they generally become due,
  • Who has ceased paying his current obligations in the ordinary course of business as they generally become due, or
  • The aggregate of whose property is not, at a fair valuation, sufficient or, if disposed of at a fairly conducted sale under legal process, would not be sufficient to enable payment of all his obligations, due and accruing due

Slide #5 – Insolvency Means

No one begins its financial life with the expectation of becoming insolvent. We become insolvent in most cases due to circumstances beyond our control, and sometimes we fall victim to the consumer society where we spend beyond our means.
In Canada, being insolvent means that you must:

  • Owe at least $1,000 and be unable to pay your bills when they become due;
  • Or have stopped paying the debts altogether;
  • Or if you sold your assets the returns would not cover your debts.

Slide #6 – What is Bankruptcy?

Bankruptcy is a legal proceeding that relieves an insolvent person of its financial obligations. When someone files for bankruptcy, the person is asking the bankruptcy court to protect him or her from its creditors.
The moment you file for bankruptcy and walk away from the trustee office, there is an immediate stop of proceeding against your creditors. All legal actions e.g., salary garnishment, judgments, collector calls will immediately stop.
However, the fact that you have filed for bankruptcy does not automatically clear your debts. Your debts are only cleared once you have received your discharge statement. We will discuss the discharge statement in more detail in subsequent slides.
In 2009 more than 250,000 individuals in Canada filed for personal bankruptcy or submitted a consumer proposal.

Slide #7 – Who Files for Bankruptcy?

Filing bankruptcy is usually the last resort for people under siege by creditors. It is a powerful vehicle for a debtor to get a fresh financial start.
It could be a business owner whose company has failed, leaving him or her personally responsible for the business debts and tax owing.
It could a person that has lost its job and was forced to live off credit before a new job was found, or sickness that prevents a person from working, or any other of many ill-fated life circumstances.

Slide #8 – Role of the Certified Insolvency Counselor & the Trustee in Bankruptcy

The trustee is the legal representative of the bankrupt person, but also acts on behalf of the creditors. In this dual role the Trustee is required to guarantee that all parties involved act fairly and in accordance with the Bankruptcy and Insolvency Act.
The Certified Insolvency counselor is an independent and impartial consultant that acts within the boundary of the law. The role of the Certified Insolvency counselor:

  • Represent the insolvent person;
  • Conducts the Initial Assessment of your current situation;
  • Negotiates with the trustee on your behalf;
  • Uses the Trustee services to file the bankruptcy;
  • Provides the mandatory counseling sessions;
  • Helps to reestablish the bankrupt person’s credit after discharge.

The role of trustee in bankruptcy:

  •  Can also conduct the Initial Assessment of your current situation;
  • Files the bankruptcy & Administers the process;
  • Provides for mandatory counseling sessions;
  • Provides the discharge certificate, if the bankrupt person has fulfilled his commitments.

Slide #9 – How Does Bankruptcy Work?

To file for bankruptcy you need to use the services of a Certified Insolvency Counselor or a Trustee in Bankruptcy. Once the bankrupt person files for bankruptcy, the trustee files the stay of proceedings electronically with the court on behalf of the bankrupt person.

Once The stay of proceedings is filed:

  • The creditors cannot take any action to seize assets, other than those signed over as security in the event of non-payment;
  • Stops any existing wages garnishment immediately and prevents any creditors from seeking a court order to garnish the bankrupt person’s wages;
  • All Collection calls also stop once the debt collectors know the person has filed for bankruptcy.

Slide #10 – What Assets the debtor is allowed to keep?

Bankrupt person is allowed to keep most of its assets. The bankruptcy and Insolvency act has certain exemptions.
Each province has rules about what is exempt from seizure. The following are the exemptions rules of all the provinces and territory.

Alberta Bankruptcy Exemptions are:

If the debtor resides in Alberta has the following exemptions:

  • Clothing $4,000
  • Household Goods $4,000
  • Tools of the Trade $10,000
  • Farmers $28,300
  • Motor Vehicle $5,000
  • Personal property i.e. tools, equipment, books – required to earn an income $10,000
  • principal residence, including a mobile home $40,000
  • Food required by the debtor and his/her dependents during the next 12 months;
  • Medical and dental aids required by the debtor and his/her dependents;
  • Where the debtor is a bona fide farmer and whose principal source of livelihood is farming 160 acres if the debtor’s principal residence is located on that 160 acres and that the 160 acres is part of the debtor’s farm;
  • If the debtor is a co-owner of the residence, the amount of the exemption is reduced to an amount that is proportionate to the debtor’s ownership interest;
  • Where the debtor’s primary income is from farming operations, personal property required by the debtor for the proper and efficient conduct of the debtor’s farming operations for the next 12 months;
  • Registered Retirement Savings Plans RRSPs, Registered Retirement Income Funds (RRIFs), Registered Disability Savings Plans (RDSP) and Deferred Profit Sharing Plans (DPSPs) and there is no one year recovered (claw back).

British Colombia Bankruptcy Exemptions are:

If the debtor resides in British Colombia has the following exemptions:

  • Household Goods $4,000
  • Tools of the Trade $10,000
  • Motor Vehicle $5,000
  • Motor Vehicle: if the debtor is behind on child care payments $2,000
  • Equity in a home in Greater Vancouver and Victoria $12,000
  • Equity in a home In the rest of the province $9,000
  • Equity in essential clothing and medical aids is unlimited;
  • Exemptions are in effect for all registered retirement savings plans (RRSP’s, RRIF’s and DPSP’s (Deferred Profit Sharing Plans);
  • Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate for RRSPs in provinces without RRSP exemption laws;

Manitoba Bankruptcy Exemptions are:

If the debtor is a non-farmer residing in Manitoba has the following exemptions:

  • Household Goods $4,500
  • Tools of the Trade $7,500
  • Motor Vehicle – necessary for work or transportation to and from work $3,000
  • Tools, implements, professional books and other necessaries $7,500
  • Necessary and ordinary clothing of the debtor and family RRSPs, Registered Retirement Income;
  • Funds (RRIFs) and Deferred Profit Sharing Plans (DPSPs);
  • Certain life insurance policies;
  • Food and fuel necessary to family for period of six months or cash equivalent;
  • Health aids, including wheelchair, air conditioner, elevator, hearing aid, eye glasses, prosthetic or orthopedic equipment, necessary to debtor or family.

If the debtor is a farmer residing in Manitoba has the following exemptions:

  • Household Goods $4,500
    Tools of the Trade $7,500
    Motor Vehicle – necessary for work or transportation to and from work $3,000
    Tools, implements, professional books and other necessaries $7,500
  • Necessary and ordinary clothing of the debtor and family;
  • animals necessary for farming operation for 12 months;
  • farm machinery, dairy utensils and farm equipment necessary for ensuing 12 months;
  • one motor vehicle if required for purposes of agricultural operations;
  • Any 160 acres of farm land upon which the debtor or his family resides, or which he cultivates or uses for grazing or other purposes, as well as all the buildings;
  • Seed sufficient to seed all land of debtor under cultivation.

New Brunswick Bankruptcy Exemptions:

If the debtor resides in New Brunswick has the following exemptions:

Household Goods $5,000
Tools of the Trade $6,500
Motor Vehicle – necessary for work or transportation to and from work $6,500

  • Necessary and ordinary clothing of the debtor and family;
  • Two horses and sets of harness, two cows, ten sheep, two hogs and twenty fowl, and food therefor for six months;
  • Necessary seed grain and potatoes required for planting purposes to the following quantities: forty bushels of oats, ten bushels of barley, ten bushels of buckwheat, ten bushels of wheat and thirty-five barrels of potatoes;
  • Necessary medical and health aids;
  • Pets belonging to the debtor;
  • Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate for RRSPs in provinces without RRSP exemption laws;
  • There will be no need to set up the RRSPs in a locked in plan to make them eligible for exemption;
  • RRSP’s associated with life insurance policies are exempt from seizure or attachment.

Newfoundland and Labrador Bankruptcy Exemptions:

If the debtor resides in Newfoundland and Labrador has the following exemptions:
Clothing of the debtor and his or her $4,000;
Household Goods $4,000
Tools of the Trade $10,000
Motor Vehicle – necessary for work or transportation to and from work $2,000
Home equity in principal residence $10,000
Items of a sentimental value to the debtor $500

  • Medical and dental aids required by debtor and dependents;
  • Domesticated animals which are kept as pets and not used for business purpose;
  • Fuel or heating as a necessity for the debtor and his or her dependents;
  • Pensions;
  • RRSPs, Registered Retirement Income Funds (RRIFs) and Deferred Profit Sharing Plans (DPSPs);
  • All RRSPs are now protected from seizure in a bankruptcy or a proposal.

Nova Scotia Bankruptcy Exemptions:

If the debtor resides in Nova Scotia has the following exemptions:

Household Goods $5,000
Tools of the Trade $10,000
Motor Vehicle $3,000
Motor Vehicle – necessary for work or transportation to and from work $6,500
Farm equipment, fishing nets, tools and implements used in debtor’s chief occupation $1,000

The debtor is allowed to keep the necessary:

  • personal wearing apparel, household furnishings and furniture;
  • fuel and food;
  • grain, seeds, cattle, hogs, fowl, sheep and other livestock;
  • medical and health aids;
  • Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate for RRSPs in provinces without RRSP exemption laws;
  • There will be no need to set up the RRSPs in a locked in plan to make them eligible for exemption;
  • RRSP’s associated with life insurance policies are exempt from seizure or attachment.

North West Territory, Nunavut and Yukon exemptions are:

If the debtor resides in North West Territory, Nunavut and Yukon has the following exemptions:
Household Goods $5,000
Tools of the Trade $600
Motor Vehicle $3,000
Motor Vehicle – necessary for work or transportation to and from work $6,500
Home equity in principal residence $3,000
Farm equipment, fishing nets, tools and implements used in debtor’s chief occupation $1,000

  • food, fuel and other necessaries of life required by the debtor and the family of the debtor for the next 12 months;
  • RRSP’s associated with life insurance policies are exempt from seizure or attachment.

Ontario Bankruptcy Exemptions are:

If the debtor resides in Ontario has the following exemptions:
Clothing $5,600.00
Household Goods $11,300
Tools of the Trade $11,300
Farmers $28,300
Motor Vehicle $5,650

  • Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate for RRSPs in provinces without RRSP exemption laws;
  • Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate for RRSPs in provinces without RRSP exemption laws;
  • RRSP’s associated with life insurance policies are exempt from seizure or attachment;
  • Ontario Sales Tax Credit (OSTC): For 2010, the new sales tax credit will provide annual relief of up to $260 for each adult and child. Ontario residents must apply for the OSTC, along with the harmonized sales tax (HST) credit when they file their income tax and benefit. The OSTC is exempt from seizure by the trustee. However, the HST tax credit will be available to the trustee to the amount necessary to cover trustee fees.

Prince Edward Island Bankruptcy Exemptions:

If the debtor resides in Prince Edward Island has the following exemptions:
Household Goods $2,000
Tools of the Trade $2,000
Motor Vehicle $3,000
Farm equipment, fishing nets, tools and implements used in debtor’s chief occupation $2,000

  • The necessary and ordinary clothing of the debtor and his family;
  • Registered Retirement Income Funds (RRIFs);
  • RRSP’s are exempt (no limit) provided they have a defined beneficiary which is a specific member of direct family.
  • in the case of a debtor who is a farmer:
  • livestock, fowl, agricultural machinery and equipment ordinarily used by the debtor in his farm operation, not exceeding $5,000 in value;
  • sufficient seed to seed all his land under cultivation not exceeding 100 acres.

Quebec Bankruptcy Exemptions are:

If the debtor resides in Quebec has the following exemptions:

  • Household good to maximum value of $6,000;
  • The food, fuel, linens and clothing necessary for the life of the household;
  • The instruments of work needed for the personal exercise of his professional activity;
  • Family papers and portraits, medals and other decorations;
  • Property declared by a donor or a testament to be exempt from seizure except in certain cases;
  • Judicially awarded support and sums given or bequeathed as support;
  • Benefits payable under a supplemental pension plan to which an employer contributes on behalf of his employees, other amounts declared un-sizable by an Act governing such plans and contributions paid or to be paid into such plans;
  • Periodic disability benefits and expense reimbursements under a contract of accident and sickness insurance;
  • Property of a person that he requires to compensate for a handicap;
  • RRSPs, Registered Retirement Income Funds (RRIFs) and Deferred Profit Sharing Plans (DPSPs);
  • A certain portion of salaries and wages based on the number of dependents.

Saskatchewan Bankruptcy Exemptions are:

If the debtor is a non-farmer residing in Saskatchewan has the following exemptions:
Personal belonging $2,000
Household Goods $4,000
Tools of the Trade $4,500
Home equity in principal residence $32,000
Home equity in principal residence (if Jointly owned) $64,000
Home equity in principal residence (if 4 people jointly owed) $128,000

  • Certain life insurance policies;
  • A motor vehicle, if required for employment;
  • RRSPs, RRIFs and DPSPs are exempt from seizure.

If the debtor is farmer residing in Saskatchewan has the following exemptions:
Personal belonging $2,000
Household Goods $10,000
Tools of the Trade $4,000
Home equity in principal residence $32,000
Home equity in principal residence (if Jointly owned) $64,000
Home equity in principal residence (if 4 people jointly owed) $128,000

  • The cash equivalent of produce sufficient to provide food and fuel for heating until the next harvest;
  • All livestock, farm machinery and equipment, including one car or truck, necessary for the next twelve months operations;
  • Seed grain equal to two bushels per acre of land under cultivation;
  • RRSPs, RRIFs and DPSPs are exempt from seizure.
  • Cash equivalent of crop equal to:
  • Unpaid harvesting costs;
  • Living expenses to next harvest;
  • Necessary costs of farming until next harvest.

If the bankrupt has assets that are not covered by the allowable exemptions e.g., family home, cottage, RESP, etc. The bankrupt must settle to keep these assets.
For example if the bankrupt has a house and has equity in the home, the bankrupt must settle on that equity if he or she wishes to keep that asset.
Sometime the bankrupt monthly cash flow does support such settlement, the bankrupt may resort to filing a proposal.

Slide #12 – What is not erased by Bankruptcy?

Discharge from Bankruptcy erases all unsecured debts e.g., credit card, lines of credit and any private debts. Bankruptcy does not erase the following debts:

  • Fines imposed by a Court;
  • Money owing for things stolen;
  • Things obtained by misrepresentation;
  • Alimony payments;
  • Award of damages by a court for intentionally inflicting bodily harm or sexual assault;
  • Student loans if bankruptcy is filed prior to or within seven years after the finish of studies.

Slide #13 – New Bankruptcy Law – July 7, 2008

The new law has introduced new set of rules.

  • 1st time bankrupts who fulfill all their duties and who do not have excess income, will be discharged in 9 months;
  • 1st time bankrupts who fulfill all their duties and who do have excess income, will be discharged in 21 months (or more at the court’s discretion);
  • 2nd time bankrupts who do not have excess income will be discharges in 24 months;
  • 2nd time bankrupts who do have excess income will be discharges in 36 months.

Slide #14 – New Bankruptcy Law – July 7, 2008

The new law exempts RRSPs and RRIFs from seizure in all provinces and territories. The bankrupt will only lose the last 12 months of any contribution to RRSP. They vary from province to province.
The discharge period of the student loan has been reduced to 7 from 10 years.

Slide #15 – Re-establishing Credit

Bankruptcy is a black mark on a person’s credit rating that stays on your credit bureau report for up to seven years. However, a diligent person can rebuild its credit as soon as the discharge certificate is received from the trustee.
Re-establishing credit involves getting two secure credits cards or getting a leased vehicle.
Your destroyed credit can be rebuilt in as little as two years. In two years, you can buy a house with 10% down payment. You can even buy a house one day after discharge with 15% down payment.

Slide #16 – What Does It Cost?

The bankrupt person makes payments for a minimum nine months. The payment is made to the trustee who has filed the bankruptcy. The payment is determined based on a calculation in the Bankruptcy and Insolvency Act. The bankrupt person is expected to pay a minimum payment. The minimum payment ranges from $180-200.
In the case of a surplus income, the bankrupt is expected to pay a minimum of 50% of the surplus. The bankrupt person is expected to report any increase or decrease in its income.
A raise in the bankrupt person’s income translates into paying a bit more on the initial amount. Likewise, a drop in its income results in a reduction in the monthly payment.

Slide #17 – Frequently Asked Questions

Question: How long will Bankruptcy stay on my credit report?
Answer: In Ontario it stays for 6 years
Question: How long will take to get discharged from Bankruptcy?
Answer: First time bankrupt expects to be discharged in nine months providing the bankrupt satisfied all the conditions imposed by the court. Sometimes it is more than 9 months. Second-time bankrupt it depends on the bankrupt behaviors, circumstances and the Trustee efforts
Question: How soon can you reestablish your credit?
Answer: You can establish your credit as soon as you get your discharged certificate.
Question: How do you establish your credit?
Answer: You reestablished your credit through obtaining secure credit cards.

Slide #18 – Why do we offer this Insight?

We at Debt free Living believe in educating you about money management principles and how to get more from your money.
Countless numbers of people are challenged financially. We want to empower you to:

  • Get a budget in your life that helps you achieve your goals. Having a budget helps you reduce or stop relying on more debt;
  • Eliminate your debt. Debt elimination is not debt consolidation.

We want to see you go from debt to wealth. We want you to lead a happy, secure and prosperous life.
We at Debt Free Living want to give you the gift of becoming debt free on $10 per day. We wrote the book on how to do it successfully. We would love to personalize a debt elimination plan for you so you can become secure about your financial future.
Click here to request my free book and your summary debt elimination plan.

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